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Retail inflation in September rose to the highest level so far in the 2024 calendar year, triggering concern among market participants. Benchmark stock market indices are trading with marginal losses in Tuesday afternoon's trade despite positive global cues and a fall in crude oil prices.

The shift in Reserve Bank of India’s (RBI) policy stance to neutral last week has led to the belief that the central bank is on its path to cut interest rates in the next meeting. Will the expectation remain valid in light of latest inflation data? There is no simple answer.

The RBI had an inkling of the rising retail inflation. In the October policy meeting, the RBI governor had warned about acceleration in retail inflation in September. Private surveys have indicated as much.

Excess monsoon rains damaged crops and disrupted supply-chains, stoking vegetable and food prices. Therefore, the spike in September inflation does not come as a surprise, even though the final print exceeded consensus estimates. As such, food and vegetable prices are prone to seasonal shocks and tend to ease on normalisation of the external environment and arrival of a new harvest.

Yet, the RBI which has been wary of inflation all this while, may as well prefer to err on the side of caution, writes Manas Chakravarty in this piece.

Still, it will not be an easy decision for the Monetary Policy Committee to make on interest rate cuts in its December meeting. One, the core inflation excluding food, vegetables, volatile fuel and commodity prices is still not rising at an alarming pace.

Two, the incoming data are showing signs of demand moderation and slowdown in the domestic economy. Industrial production, as represented by the Index for Industrial Production, contracted for the first time in 22 months in August. Car manufacturers are seeing subdued retail sales. Discounts are back and hopes are pinned on the festive season to clear inventories at dealers. Business updates from FMCG companies also indicate mixed sales trends.

Additionally, the RBI has to deal with rising risks to the external sector from the US presidential election, trade wars, the Chinese stimulus and the global economic slowdown. This can shift the RBI’s goalpost from inflation management to supporting the economy.

“We think the impulse will have to come from the growth side. If the GDP print for the July-September quarter undershoots the RBI’s projection of 7 percent and leads to a reassessment of the FY25 forecast of 7.2 percent, then the needle could move from strict inflation-targeting to flexible inflation-targeting,” explain economists at Nomura.

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